When you’re short on fund, you’re probably searching ways to get the money you need right now.
Payday loans are usually offered as a short-term solution to financial emergencies. This sort of loan is easy to apply for, but can be very risky. Payday loans charge high interest rates and often have hidden fees that can trap you in a cycle of debt.
Another option is a personal loan. To apply this loan, you have to meet the lender’s requirements in terms of credit score, income and other factors. But the biggest advantage is, personal loans have much lower interest rates than payday loans. On account of this, personal loans are often used to consolidate debt.
Here’s what you need to know about the differences between these loans and how you can decide which is best for you.
Payday Loans vs. Personal Loans: An Overview
Payday loans and personal loans have some similarities. With both loans, you can get a lump-sum of money in few days to cover emergencies, credit card consolidation and other bills. Both loans have interests and fees.
However, these loans can differ significantly. Payday loans are generally used to borrow small amounts of money, most of them have a borrowing limit of $500-$1,000, this amount is less than you can get from personal loans. This loans were designed for those who have bad credit and have no collateral, you won’t need any collateral for these loans, and they can be very expensive, it tend to have higher interest rates—up to 400%—than other forms of lending and hit you with hidden fees.
Personal loans are typically offered by a bank, credit union, or online personal loan lender, you have to be at least 18 years old to borrow a personal loan. Personal loans are normally for much larger amounts of money than payday loans, you can borrow as much as $100,000 from some lenders, but you will have much longer to repay this money. The interest rates and fees for a personal loan are much lower than for a payday loan, if you have a good or excellent credit score, the interest rates could be lower than a credit card. So borrowing a personal loan can be cheaper than a payday loan.
There are several key differences between payday loans and personal loans when it comes to meeting emergency expenses:
- Loan term and loan amount. Many payday loans have a maximum borrowing limit of $500-$1000, and personal loan have a maximum borrowing limit of $100,000. For this reason, a payday loan is an extremely short-term loan usually due within a month, while the term for a personal loan is at least 24 months.
- Accessibility. Payday loans can be easier to apply for, especially for people with poor credit score and other financial emergencies, and you can receive the money within an hour after delivering information, while personal loans may need several days to process.
- Impact on your credit score. Most payday lenders don’t report to the credit bureaus. This means that only personal loans show up on your credit report. If you take out a personal loan and make payments on time, your credit score will climb, which will help you qualify for better loans and interest rates in the future.
The Bottom Line
Payday loans are almost always more expensive than personal loans when it comes to borrowing money, and are riskier as well. If you are able to qualify for a personal loan, choosing this option will allow you to borrow more money, give you more time to pay it back, and charge you a lower interest rate. If you need some emergency money, you should first apply for a personal loan.